Inclusionary zoning, Part 2
[Continued from Part 1, posted yesterday]
D. Why it works
Inclusionary zoning is popular, and spreading: among the states and cities (most of them progressive) that have adopted or are adopting some variant are Boulder CO, Burlington VT, Los Angeles, Massachusetts, New York City, San Diego, and Santa Cruz CA. It’s jumped the pond as well, in the form of
Communities that do enact inclusionary zoning love it, in part because it produces new homes:
A total of 4,271 affordable units have been created through the inclusionary and 421-a programs. “It’s sort of Robin Hood,” said Adam Weinstein, president of Phipps Houses, a nonprofit affordable housing group that owns or manages about 13,000 apartments in Manhattan, Queens and the Bronx. “It’s taking the enormous value in a strong market and transferring - cream skimming, in effect - some of that value for social good: affordable housing,” he said.
As far as I know, inclusionary zoning has never been repealed (unlike rent control, which has been repealed everywhere it was enacted, except a few holdouts where the entrenched beneficiary population has become a single-issue screech chorus).
“Don’t you dare repeal rent control!”
Why is it both popular and effective? There are seven reasons:
Like dwarfs? No, more like deadly sins.
1. Paid in kind, not cash
Government is a factory that produces only two products: laws and money. Money must be budgeted. Budget increases mean tax hikes. That takes political capital. Laws, on the other hand, at first blush require no outlays, so no tax hikes.
Localities love finding ways to raise revenue without taxing the voters — hence we have the taxi tax, the hotel tax, the airport tax, in short the whole swarm soak-the-tourist taxes. But after a while, even the tourists notice how annoying these are, and there is a backlash.
In-kind payments are an improved form of stealth taxes. Like inheritance taxes and property transfer taxes, inclusionary zoning payments are contingent, assessed only as a byproduct of an otherwise economically happy occasion. Their particular genius is that they are never reduced to filthy lucre that pours into government’s coffers — instead government barters them for politically pure homes for our worthy poor people. As Prince Hal understood, when praying for victory:
O, not to-day, think not upon the fault
My father made in compassing the crown!
Though all that I can do is nothing worth,
Since that my penitence comes after all,
Imploring pardon.
There ain’t no such thing as a free lunch, but there is such a thing as an invisible and non-monetary tax.
2. Rides on the economy
When does land become more valuable? When the economy rides up. When is affordable housing more needed? Same drivers. What expands the cost-value gap? The same rising tide.
Joe Restuccia, executive director of the Clinton Housing Development Company, which, along with another affordable housing company, L&M Equities, developed an inclusionary-zoning project, appreciates the opportunity to make such deals.
Mr. Restuccia also appreciates getting his hands on that incredibly valuable entitlement to develop.
“Few other cities have the incredibly dynamic real estate market we have where there’s such a spread between the market rents and the affordable housing rents,” he said. “So, because market-rate units bring in so much rental income, the projects have the ability to support a greater number of affordable units.”
It’s particularly amusing that a major reason
Riding along on the underside of rent control
Inclusionary zoning thus automatically becomes more valuable as the economy grows — the connection is not just correlative, it’s causal. And its enactment spends only intangible future benefits, so that the voters swallow the pill before they realize what they have done to their land values. Indeed, those who most loudly clamor for community diversity tend to be those with large green plots of land, and by separating their passions from their pocketbooks, they vote the former without realizing the consequence to the latter.
“The traditional equation,” said Shaun Donovan, the commissioner of the Department of Housing Preservation and Development, “has been that the stronger the real estate market, the harder it is to provide affordable housing. These programs turn that old equation on its head because the stronger the market, the greater the incentive for developers to use these programs and, therefore, provide affordable housing.”
3. Self-adjusted sizing
Riding on the economy, inclusionary zoning’s value also rides on inflation. Further, its in-kind benefits are typically specified as percentages (self-adjusted based on development scale), with affordability measured as percentages of median income (also self-adjusted). Self-adjustment means that lawmakers are not periodically called back to reauthorize or recalibrate the program, and hence have fewer opportunities to bollix up the settings.
“We have to reauthorize this???”
Under the program that linked the two buildings, developers can build an extra four square feet of market-rate space for every square foot of affordable space that is created. [For those of you who took arithmetic in school, that’s 20%. — Ed.] If the affordable project is done off-site, it must be within the same community-board area or within half a mile of where the market-rate development is being constructed. Part of the concept is to foster mixed-income communities.
4. Automaticity
[Yes, I know your spellchecker thinks that’s not a word; we authors and housing theoreticians have a license to coin. Besides, what other word would you use?]
As a design choice, inclusionary zoning can be handled either wholesale or retail:
- Wholesale: The percentage and affordability levels are stipulated by statute or regulation and apply to all developments within temporal and spatial boundaries. Chapter 40B works this way.
- Retail. Each transaction is independently negotiated. The
Personally, I much favor wholesale, because of its automaticity. Wholesale delivery means developers know what the toll will be; knowing this, they build it into their financial projections. They make forward investment decisions in anticipation of using the resource:
For example, Mr. Weinstein said his organization [Phipps House] holds “an extremely valuable piece of real estate” on
By contrast, the UK’s Section 106 program, although identical in concept, is mired in negotiation constipation as localities and developers grapple endlessly over just how much of a benefit each developer must provide for each site. And with rapid market changes, repricing becomes a maze, sometimes one with an exit that is never where you think it will be.
.
5. Ring-fenced
Being an in-kind extraction, inclusionary zoning is effectively ring-fenced — it can be used only for housing. At the state and especially at the local level, funds appropriated for housing are often mysteriously redirected into ‘infrastructure’ — everything from schools to bridges to civic centers. Housing never wins these inter-departmental budgetary battles, so it’s better to protect housing from that predation.
“Housing is as housing does.” — Forrest Gump, developer
6.
Inclusionary-zoning benefits come into being when a developer proposes to act on a parcel. Since there are always more developers than there are parcels, the city or town is in the enviable position of being able to sit back and wait as the developers jostle one another to offer the best deal.
When the commodity can be traded, as in 421A certificates, the potential resale adds a level of cost (transaction fees and search costs) but also another level of efficiency, in that the intangible goods flow to their best user.
Under the 421A program (link in .pdf), a developer of affordable housing can sell the city-issued certificates to developers of new luxury buildings - primarily those between 96th Street and Houston Street in Manhattan - providing a 10-year property tax abatement on the market-rate building.
Not only do markets clear, competition establishes a market price.
The stronger the luxury market - meaning the greater the value of a new building - the higher its property taxes will be; and, therefore, the greater the benefit in buying a tax abatement. So, if a developer is selling condominiums with reduced property taxes, buyers will be able to afford higher purchase prices because their tax bills will be lower.
7. Dispersal of affordable units inhibits enclave or ghetto-ization
Over the decades, we have learned the hard way that severe concentration of the lowest incomes hurts communities, properties, and residents. Not only does the ideal community offer variety of configurations and tenures, it also offers diversity of income and housing cost. This provides mobility within the affordable community (you move up within, not out of, the neighborhood) and additionally provides role models and experience diversity — all things that encourage very low income households to grow children better off than their parents.
Inclusionary zoning furthers the goal of income mixing because it both statutorily and economically caps the percentages of low (or very low) households within a larger development:
Mr. Donovan, the city’s housing commissioner, said mixed-income communities are the right model for the future. With the inclusionary program, he said, “we’re essentially creating new neighborhoods from the ground up.”
E. What it doesn’t do
Sounds great, doesn’t it? Is there anything inclusionary zoning doesn’t do?
Is there a skeleton in inclusionary zoning’s closet?
Yes, there is. It doesn’t produce enough housing.
Again by definition (both statutory and economic), inclusionary zoning handles only a fraction of the homes in any given development. Affordable housing always costs money, and the implicit subsidy is limited essentially to this equation:
Inclusionary zoning: value of in-kind subsidy
+ Embedded in-kind tax per market home developed
X Ratio of market to affordable homes (
= Aggregate in-kind subsidy per affordable home developed
You can make any individual point shine as brightly as you like,
But you can’t increase the total light flowing through the lens.
Because of the ‘focus’ multiplier (market homes to affordable homes), we can use inclusionary zoning to deliver any desired level of affordability, but as the affordability gets deeper, the number of beneficiaries shrinks proportionately. And though the per-home value rises in stronger markets, the cost-value gap rises even more. Even in
The current negotiable rate for 421A certificates is about $13,000 for each luxury apartment.
Multiply times four (20% affordable) and that’s $52,000 per home of in-kind subsidy. Good, right? Not when homes in
But more [affordable apartments] will certainly be needed, said George W. McCarthy, a housing economist at the Ford Foundation. Calling himself “a big fan of inclusionary zoning and 421A incentives,” Dr. McCarthy said, “While these market-based programs are laudable, they are still insufficient to meet the growing needs of New York City’s low- and moderate-income families.”
And in this lies the (admittedly, secondary) danger of inclusionary zoning: a community may congratulate itself on building homes, and believe that inclusionary zoning is providing enough and obviating the need for appropriated programs, or fiscal incentives. It doesn’t. Government doesn’t get off that lightly … although many a government pretends that it believes it is.
F. A Really Useful Tool
Inclusionary zoning combines principles that we have proven the hard way. Though no panacea, it’s a really useful tool.
I’ve got one!
